CHAPTER ONE INTROUDCTION 1.

1 BACKGROUND OF STUDY The current period in the world economy is regarded as period of globalization and trade liberalization. In this period, one the crucial issues in development and international economics is to know whether trade openness indeed promotes growth. With globalization, two major trends are noticeable: first is the emergence of multinational firms with strong presence in different, strategically located markets; and secondly, convergence of consumer tastes for the most competitive products, irrespective of where they are made. In this context of the world as a global village, regional integration constitutes an effective means of not only improving the level of participation of countries in the sub-region in world trade, but also their integration into the borderless and interlinked global economy. (NEEDS, 2005). Since 1950, the world economy has experienced a massive liberalization of world trade, initially under the auspices of the General Agreement on Tariffs and trade (GATT), established in 1947, and currently under the auspices of the World Trade Organization (WTO) which replaced the GATT in 1993. Tariff levels in both developed and developing countries have reduced drastically, averaging approximately 4% and 20% respectively, even though the latter is relatively high. Also, non-tariff barriers to trade, such as quotas, licenses and technical specifications, are also being gradually dismantled, but at a slower rate when compared with tariffs. 1

The liberalization of trade has led to a massive expansion in the growth of world trade relative to world output. While world output (or GDP) has expanded fivefold, the volume of world trade has grown 16 times at average compound rate of just over 7% per annum. In fact, it is difficult, if not impossible, to understand the growth and development process of countries without reference to their trading performance. (Thirlwall, 2000). Likewise, Fontagn and Mimouni (2000) noted that since the end of the European recovery after World War II, tariff rates have been divided by 10 at the world level, international trade has been multiplied by 17, world income has quadrupled, and income per capita has doubled. Incidentally, it is well known that periods of openness have generally been associated with prosperity, whereas protectionism has been the companion of recessions. In addition, the trade performance of individual countries tends to be good indicator of economic performance since well performing countries tend to record higher rates of GDP growth. In total, there is a common perception that even if imperfect competition and second best situations offer the possibility of welfare improving trade policies, on average free trade is better than no trade. From the ongoing discussion, it is evident that trade is very important in promoting and sustaining the growth and development of an economy. No economy can isolate itself from trading with the rest of the world because trade act as a catalyst of growth. Thus Nigeria, being part of the world, is no exemption. For this reason, there is a need to thoroughly examine the nature of relationship between trade openness and output growth in Nigeria.

1.1.2

TRADE OPENNESS AND OUTPUT GROWTH: HISTORICAL EXPERIENCE OF THE NIGERIA ECONOMY

Today, Nigeria is regarded to have the largest economy in sub-Saharan Africa, excluding South Africa. In the last four decades there has been little or no progress realized in alleviating poverty despite the massive effort made and the many programmes established for that purpose. Indeed, as in many other sub-Saharan Africa countries, both the number of poor and the proportion of poor have been increasing in Nigeria. In particular, the 1998 United Nations human development report declares that 48% of Nigerias population lives below the poverty line. According to the report (UNDP, 1998). The bitter reality of the Nigerian situation is not just that the poverty level is getting worse by the day but more than four in ten Nigerians live in conditions of extreme poverty of less than N320 per capita per month, which barely provides for a quarter of the nutritional requirements of healthy living. This is approximately US 8.2 per month or US 27 cents per day. Doug Addison (unpublished) further explained that the Nigeria economy is not merely volatile; it is one of the most volatile economies in the world. There is evidence that this volatility is adversely affecting the real growth rate of Nigerias gross domestic product (GDP) by inhibiting investment and reducing the productivity of investment, both public and private. Economic theory and empirical evidence suggest that sustained high future growth and poverty reduction are unlikely without a significant reduction in volatility. Oil price fluctuations drive only part of Nigerias volatility policy choices have also contributed to the problem. Yet policy choices are available that can help accelerate growth and 3

thus help reduce the percentage of people living in poverty, despite the severity of Nigerias problems. During the period 1960-1997, Nigerias growth rate of per capital GDP of 1.45% compares unfavorably with that reported by other countries, especially those posted by china and the Asian Tigers such as Hong Kong, Singapore, Taiwan, and south Korea, viewed in this comparative perspective, Nigerias per capita income growth has been woefully low and needs to be improved upon. (Iyoha and Oriakhi, 2002). In like manner, Ogujiuba, Oji and Adenuga (2004) wrote that the Nigerian economy has severally been described as a difficult environment for business with a population growth of about 3%, it has been acknowledged that the current average output growth rate of less than 4% will see the country being poorer in the next decade. A study conducted by Iyoha and Oriakhi (2002) on Nigerias per capita GNP from 1964 to 1997 show that it rose steadily from US$120 to US$780 in 1981. Thereafter, it fell almost steadily to US$280 in 1997. Thus, between 1964 and 1981, income per capita increased by 550% or at an annual average rate of 32.3% while between 1981 and 1997, it fell by 64.1% or at an annual average rate of 4%. It is worth noting that if income per capita had continued to increase beyond 1981 as it did before then, Nigerias GDP per capita would have equaled US$1,279 in 1997. The difference between US $280 and US$1,279, i.e., approximately, US$1,000.00, is a rough measure of the cost to the average Nigerian of domestic macro economic policy mistakes and adverse international economic shocks. Likewise in 1960 agricultural exports accounted for only 2.6%. Exports of other commodities like tin 4

and processed goods amounted to 26.6% of total exports. By 1970 agricultural exports only accounted for 33% of total exports while petroleum exports had started to establish dominance by exceeding 58% of total exports. By the time the oil boom began in earnest in 1974, petroleum exports accounted for approximately 93% of all exports. The relative share of agricultural exports in total exports had shrunk to 5.4% while other products accounted for the remaining 1.9%. Since 1974, with the exception of 1978 when the relative share of petroleum in total exports has exceeded 90%. In deed, since 1990, the relative share of petroleum in total exports has exceeded 96%. Agricultures contribution has fluctuated between 0.5% and 2.3% while the share of other products has fluctuated between 0.5% and 1.7%. Thus petroleum exportation has totally dominated the economy and indeed government finances since the mid-1970s. Meanwhile, a puzzling and disturbing aspect of Nigeria export boom is that the growth it generated did not seem to be lasting or to have had a significant effect in changing the structure of the economy. For instance, in the 1970s there was a major increase in measured GDP but the structure of the economy remained basically unchanged (see figure 2 below). This led professor Yesufu (1995) to describe the Nigerian economy as one that had experienced growth without development. Figures 1: trend of real GDP

300000

Real GDP

250000 200000 150000 100000 Year 500000

-.-RGDP linear (RGDP)

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 During the period of 1970 1985, import substitution industrialization (ISI) strategy was a dominant feature of trade policy in Nigeria. The trade policy was generally inward oriented. Under this ISI strategy, Infant manufacturing industries were protected using high tariffs, import quotas, and other trade restrictions like import licensing. Non-tariff barriers to trade such as import prohibitions were also utilized. During this period, trade policy was also adjusted in response to the exigencies of the balance of payments. Also, Nigeria was operating a fixed exchange rate regime under which the value of the Naira was essentially tied to US dollar and gold. It is worth noting that the trade policy pursued during this period resulted in a rapid increase in manufacturing production and employment, particularly during the era of the oil boom (1975 -1980) and that led to a rise in

the share of manufacturing in Gross Domestic product (GDP) from 5.6% in 1962/63 to 8.7% in 1986. (Iyoha and Oriakhi, 2002). In 1986, Nigeria adopted the structural adjustment programme (SAP) of the IMF/World Bank. With the adoption of SAP in 1986, there was a radical shift from inward-oriented trade policies to out ward oriented trade policies in Nigeria. These are policy measures that emphasize production and trade along the lines dictated by a countrys comparative advantage such as export promotion and export diversification, reduction or elimination of import tariffs, and the adoption of market-determined exchange rates some of the aims of the structural adjustment programme adopted in 1986 were diversification of the structure of exports, diversification of the structure of production, reduction in the over-dependence on imports, and reduction in the over-dependence on petroleum exports. The major policy measures of the SAP were: Deregulation of the exchange rate Trade liberalization Deregulation of the financial sector Adoption of appropriate pricing policies especially for petroleum products. Rationalization and privatization of public sector enterprises and Abolition of commodity marketing boards. However, as a result of trade liberalization gospel of the SAP, the Nigeria external sector really experience dramatic growth. For instance, the total domestic exports of Nigeria in

2006 amounted to N755141.32 million against N6621303.64 million in 2005 showing an increase of 14.10%. Domestic exports recorded negative growth rates in 1993 (7.70%), 1994 (45.5%), 1997 (2.03%), 1998 (38.48%) and 2001 (27.06%); while it recorded positive growth rates in other periods. The largest increase in domestic exports was witnessed in 1995 (448.42%). Total imports (C.I.F) stood at N2922248.46 in 2006 as against N1779601.57 million in 2005 recording an increase of 64.20%. Total imports also recorded negative growth rates in 1994(45.72%),1998(9.41%) and 2004(18.07%) while it is positive all through other years. The value of total merchandise trade amounted to N10477389.78 million in 2006 as against N45272.24 recorded in 1987. External trade was dominated by domestic exports between 1987 and 2006 averaging 67.17% while imports (C.I.F) averaged 32.82% (see figure 3 below), consequently, the trade balance was positive between 1987 and 2006. Oil export remains the dominant of export trade in Nigeria between 1987 and 2006 accounting for about 93.33% of total domestic exports. On the other hand, non oil exports accounted for a small value of 6.67% over the same period. (NBS report, 2008). Therefore, it could be understood that the SAP involved the deregulation and liberalization of the Nigerian economy. This policy thrust of this program dovetailed nicely with the emerging international orthodoxy to the effect that deregulation and economic liberalization would yield the optimal allocation of scarce resources, reduce waste, and promote rapid economic growth in developing countries. Unfortunately, there has been no significant progress made in the achievement of these objectives. The openness of the economy has significantly increased in the past four decades, with the trade-GDP ratio rising from 8

31.54% in 1970, to 46.91% 1980, 57.23% in 1990, 88.16% in 1995, 85.26% in 2003 and 57.63% in 2007 (see figure 4 below) indeed, in the 1990s the ratio of trade to GDP has averaged 70%. This extreme openness of the economy could be disadvantageous in that it makes the country highly susceptible to internationally transmitted business cycles, and, in particular international transmitted shocks (like commodity price collapse). A good example of this effect on the Nigerian economy is that of the global food crisis of 2007 and the current global economic/financial crisis. FIGURES 4: THE DEGREE OF OPENNESS NIGERIA IMPORT AND EXPORT 100 90

Degree trade openness (5)

80 70 60 50 40 30 STATEMENT OF THE RESEARCH PROBLEM 2010

1.2

20 Nwafor Manson 1965 1970 not that the Nigerias trade policy over 2000 2005 (unpublished) 1975 1980 1985 1990 1995 the years 0 10 has been determined by one/ more of the following.

Need to protect and stimulate domestic production (import capital goods at low prices etc)

Need to ameliorate/prevent balance of payment problems. Need to boost the value of the naira Need to be competitive and enjoy the benefits of openness. Need to increase revenue and International agreements Today, as part of moving with the trend of globalization and trade liberalization in

the global economic system, Nigeria is a member of and signatory to many international and regional trade agreements such as international monetary fund (IMF), world trade organization (WTO), economic community of West African States (ECOWAS), and so many others. The policy response of such economic partnership on trade has been to remove trade barriers, reduce tariffs, and embark on outward-oriented trade policies. Despite all her effort to meet up with the demands to these economic partnerships in terms of opening up her border, according to the 2007 assessment of the trade policy review, Nigerias trade freedom was rate 56% making her the worlds 131st freest economy while in 2009, it was ranked 117th freest economy, the countrys GDP was also ranked 161st in the world in February, 2009. The economy has struggled vigorously to stimulate growth through openness to trade, In fact, it seems that as the country put greater effort to boost her economic growth

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by opening up to trade with the global economy the more she becomes worse-off relative to her trading partners in terms of country output growth. Having reviewed the related literatures and considering the structure of the Nigerian economy as related to trade openness and output growth, we may then ask the following questions. Does trade openness have any significant impact on out put growth in Nigeria? Is there any other macroeconomic variable that has significant impact on output growth in Nigeria? Is there any linear association (correlation) between trade openness and output growth in Nigeria? Is there long run relationship between trade Openness and output growth in Nigeria? Has there been any significant structural change in output growth between the preSAP and post-SAP period in Nigeria?

1.3 OBJECTIVES OF THE STUDY The broad objective of this research work is to study, in its entirely, the relationship between trade openness and output growth in Nigeria. This broad objective can be subdivided into the following smaller objectives: To examine the impact of trade openness on output growth in Nigeria. To identify other internal and external macroeconomic shocks that determines output growth in Nigeria.

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To identify other international and external macro economic shocks that determines output growth in Nigeria.

To determine the linear association (correlation) between trade openness and output growth in Nigeria.

To ascertain the possibility of long run relationship between trade openness and output growth in Nigeria.

To determine the possibility of structural changes (if any) in output growth between the pre-SAP and post-SAP period.

1.4

STATEMENT OF THE RESEARCH HYPOTHESES In view of the foregoing study, with respect to trade openness and output growth in

Nigeria, the following null hypothesis will be tested: Ho: Ho: Trade openness does not have any significant impact on output growth in Nigeria. There is no other macroeconomic variable (internal and external) that have significant impact on output growth in Nigeria. Ho: There is no linear association (correlation) between trade openness and output growth in Nigeria. Ho: There is no long run relationship between trade openness and output growth in Nigeria. Ho: There is no significant structural change in output growth between the pre-SAP and post-SAP period.

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1.5

JUSTIFICATION OF THE STUDY

Nigeria is currently undergoing a series of transformation in every sector of the economy, including the external sector of the economy. The countrys economic policy in the last two decades had one dominating theme which is an integral part of the structural Adjustment programme (SAP) trade liberalization. This policy was espoused on the argument that it enhances the welfare of consumers and reduces poverty as it offers wider platform for choice from among wider variety of quality goods and cheaper imports. Today, there are many existing literature on the topical issue of trade openness and growth of which some support the axiom that openness is directly correlated to greater economic growth with the main operational implication being that governments should dismantle the barriers to trade. The focal point of this research work is to identify the short comings and benefits of this argument as well as check the validity of this mainstream axiom I Nigeria in the presence of various internal and external shocks. 1.6 SIGNIFICANCE OF THE STUDY

The role of international trade in the developmental journey of an economy can not be over emphasized, especially with the current trend of globalization. Nigeria. Being part of the global village, is not left out of this world development. This research work is carried out to study how trade openness has influenced the performance of the Nigeria economy through output growth in the presence of other internal and external shocks. The findings of this re13

search work transcend beyond mere academic brainstorming, but will be of immense benefit to federal agencies, policy makers, intellectual researcher and international trade think tanks that occasionally prescribe and suggest policy options to the government on trade related issues. It will also help the government to see the effectiveness of trade liberalization policy on the economic growth of the nation over the years. This research work will further serve as a guide and provide insight for future research on this topic and related field for students who are willing to improve it. It will also educate the public on various government policies as related to trade issues. 1.7 SCOPE AND LIMITATION OF THE STUDY

This research work span through the period of 1970-2007 (38 years), and is within the geographical zone of Nigeria. Thus, it is a country-specific research. This research exercise, like every other research work, is really a rigorous one that consumes much time and energy especially in the area of data sourcing, data computation and modeling. This work is relatively limited base on time and financial constraints, data availability precision of data and data range, and methodology adopted which could further be verified by future research. Nevertheless, the researchers have properly organized the research so as to present dependable results which can aid effective policy making and implementation at least for the time being.

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CHAPTER TWO LITERATURE REVIEW Openness refers to the degree of dependence of an economy on international trade and financial flows. Trade openness measures the international competitiveness of a country in the global marked. Thus, we may talk of trade openness and financial openness. Trade openness is often measured by the ratio of import to GDP or alternatively, the ratio of trade to GDP. It is now generally accepted that increase openness with respect to both trade and capital flows will be beneficial to a country. Increased openness facilitates greater integration into global markets. Integration and globalization are beneficial to developing countries although there are also some potential risks. (Iyoha and Oriakhi, 2002). Trade openness is interpreted to include import and export taxes, as well as explicit non tariff distortions of trade or in varying degrees of broadness to cover such matters as exchange-rate policies, domestic taxes and subsides, competition and other regulatory policies, education policies, the nature of the legal system, the form of government, and the general nature of institution and culture (Baldwin, 2002). 2 EMPIRICAL LITERATURE

The relationship between trade openness and growth is a highly debated topic in the growth and development literature, yet this issue is far from being resolved. There is a long history of research, both theoretical and empirical, that provides at least an answer to the question: 15

does openness to trade result in the growth of output (say, GDP)? But currently there is no consensus, either empirically to theoretically, on the nature of the relationship between trade openness and output growth. In fact, this is because the mechanisms behind it are not well understood. The existing empirical literature however does not provide clear evidence on relationship between trade openness and growth. Many studies provide evidence that increasing openness has a positive effect on GDP growth. On the other hand some studies report that it is difficult to find robust positive relationships or even that there is negative relationship between openness and growth. Some studies, among other Rodriguez and Rodrik (1999) and Rodriguez (2006), critically argue that trade policy variables are mostly uncorrelated with growth, while the trade shares can correlate with income levels and growth rates. But the complexity of links of causality and endogeneity among trade shares, growth and other sources of growth make a difficulty to define a strong effect of openness on economic growth. Theoretical growth studies suggest very complex and different relationships between openness and growth and the empirical evidence is not unambiguous. The growth theory supposes that a countrys openness to world trade improves domestic technology, and hence an open economy grows faster than a closed economy through its impact on

technological enhancement (Jin, 2006). Harrison (1996) asserted that openness to trade provides access to imported inputs, which embody new technology, increases the size of the market faced by the domestic producers, which raises the return to innovation, and facilitates a countrys specialization in research intensive production.

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In line with potential dynamic gains of trade openness, most early empirical studies have examined a set of trade openness measures and with their correlation with each other and with economic growth and found a clear positive link. For example, Harrison (1996) looked at a number of openness indicators that turned out to have a positive association with economic growth and produced evidence in support of bi-directional casualty between openness (trade share) and economic growth. Recent research, however, has questioned the robustness of the relationship. For instance, Harrison and Hanson (1999) show that the often quoted Sachs and Warner (1995) openness and growth link as claimed. Rodriguez and Rodrik (1999) confirm the Harrison Hanson critique and argued that much of the work to correlate trade openness and economic growth has been plagued with subjective and collinear measures of openness that, though positively related with economic growth, arrive at their conclusion through problematic econometric methodologies. Harrison (1996) and Pritchett (1996) show that the various measure of trade openness tend to be only weakly correlated and are often of the wrong sign. In general, empirical studies suffer from a number of short comings, and as a result they have not resolved the questions surrounding the correlation between openness and growth. Baldwin (2000) offers explanation for the differences among researchers of the openness growth nexus. According to him, while econometric analyses based on quantitative data are limited by the scope and comparability of available quantitative data, differences in what investigators regard as appropriate econometric models and tests for sensitivity of the results to alternative specifications that may be based in part on the personal policy predilec17

tions of authors and can also result in significant differences in the conclusions reached under such quantitative approaches. If these studies used measures that were even slightly correlated, then empirical literature together could be taken as proof of a positive relation between openness and growth. Baliamoune-lutz and Ndikumana (2007) observed that, from a methodological stand point, the weak link between trade liberalization and growth may be attributed to measurement imperfections: the indicators used in empirical analysis may not capture the true essence of openness. Indeed, due to lack of data on indicators of trade openness as a policy empirical studies (as this one does) resort to measures of trade outcomes i.e. trade volume, as proxies for trade openness it is assumed that positive trade outcomes are an indication of a policy environment that is at least not anti-trade. Moreover, a high trade volume indicates exposure to international markets with the associated benefits (e.g. technological transfer) which openness policies seek to achieve. Thus, to some extent trade outcomes do carry some indication of the effects of trade liberalization. Nonetheless, results from analyses using trade volume as a measure of trade openness have to be interpreted consciously. Indeed, variations in the volume of trade do not always reflect actual government policies that promote or hinder trade. For instance, fluctuations in commodity prices result in changes in trade flows even in the absence of shifts in trade policy. The weak empirical evidence on the link-between trade liberalization and growth can also be due to problems of misspecification. In particular, the effects of trade liberalization may materialize only with a lag. In the short run, liberalization may have negative effects, especially by undermining domestic production because of competitive import, retarding 18

growth (Mukhopadhyay 1999). Hence, to the extent that these negative short-run effects and the expected delayed positive effects occur consecutively, growth would exhibit a Jcurve of response to trade openness (Greenaway etal 2002). Therefore, empirical studies may yield inconclusive and even misreading results if these dynamic and counter balancing effects are not fully taken into account. Another explanation relates to the structure of trade. Whether a country benefits from trade liberalization or not in terms of growth depends on the composition of trade. Mazumdar (1996) hypothesized that the composition of trade determines the strength of the engine of growth. Indeed lower and Van Den Berg (2003) final evidence supporting the view that countries that import capital goods and export consumer goods growth faster than those that export capital goods. The evidence suggests that African countries and developing countries in general would benefit from trade most by promoting exports of labour-intensive goods and services while encouraging imports of capital goods. (Lopez 1991). This implies that the current export boom which is driven by capital-intensive growth that is sustainable, especially because of the low gains in employment creation and limited spill over effects on non-oil sectors. Dollar (1992) brought an important contribution to the trade and growth debate. The author defines openness as the combination of two diversions: i. ii. A low level of protection, hence of trade distortions and A stable real exchange rate so that incentives remain constant over time.

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From that very definition, follow two measures openness: a trade distortion index, and a real exchange rate variability index. The distortion index measures the deviation from the law of one price after controlling for the impact of non-tradable. The variability index captures the variance of the real exchange rate. The author considers a sample of 95 countries over the period 1976 -1985 and regresses average per capital growth upon his openness indexes and the average investment rate. Both the distortion index and the variability index are significantly negatively correlated with growth and the investment rate comes out with a significantly positive coefficient. Dow Rick (1994) tests whether trade openness affects output growth and /or investment. He considers a sample of 74 countries over the period 1960-1990. As openness indicator, the author considers the residuals of an OLS cross-country regression of the average trade intensity upon a constant and average population. In a second stage, the author runs crosscountry OLS regressions of average per capita GDP growth upon the average investment rate, the initial GDP level and his openness indicator. The coefficient on openness is significant and positive. More over, dropping the investment rate considerably lowers the overall fit of the model but enhance the coefficient on openness, which according to the author suggests that openness works partly through increased investment rates. In a third stage, the author computes decade averages for his variables and turns to panel data techniques, gauging that such techniques enable some control for time invariant country-specific factors such as institutional arrangements that might be correlated with the explanatory variables. The author uses labour productivity growth as dependent variable 20

and estimates both fixed-effects and random-effects models. He reports that the coefficient on openness is still significant and positive, but its point estimate is much lower than in the OLS specification. In a fourth set of regressions, the author also considers growth in openness instead of openness itself. The author interprets this as reflecting the fact that static efficiency effects of trade liberalization are negligible for countries with well-developed markets. Finally, in its conclusions, the author cautions that his results, showing the beneficial effects of increased openness, hold on average, but are not a universal truth, valid always and every where. In particular, he stresses that trade liberalization can indeed stimulate growth in the aggregate world economy. Whilst trade may have such positive effects for some countries, it may conversely lock in other countries into a pattern of specialization in low-skill, lowgrowth activities. Sachs and Warner (1995) brought a seminal contribution to that literature. Their central hypothesis is that some developing countries fail to grow rapidly enough as to converge because they are simply not open to trade. In their own wards: convergence can be achieved by all countries, even those with low initial level of skill, as long as they are open and integrated in the world economy. To check their hypothesis, the author first carefully, build and discuss an openness measure. Building upon a sample of 135 countries over the period 1970-1990, they construct and openness dummy variable that is zero if any of the 5 following conditions is true: Non-tariff barriers covering 40% or more of trade 21

Average tariff rate above 40% Black market premium above 20% The economy is ruled by a socialist system, or There is a state monopoly on exports. Otherwise, if none of these 5 conditions is fulfilled, the openness dummy is one.

The authors first divide their countries sample into open ones and closed ones, and show that closed countries have grown at about the same rate (essentially about 0.7% a year), no matter whether they are developed or not. By contrast, open developing countries have grown much faster than their developed counter parts (4.49% versus 2.29%). Going beyond these stylized facts the authors re-do the same regressions as in Barro (1991) and add their openness dummy to them without the dummy, the results are sensibly the same as in Barro (1991). After adding the openness dummy in the regresses list, it appears its coefficient is highly significant. The points estimates suggest that open economies grow on average 2.45% faster than closed ones. Moreover, educational attainment variables become even less significant than in Barro (1991), which leads the authors to think that .growth rate over this period was determined less by initial human capital levels than by policy choices. They also address a specialization-related issue. Specifically, they test whether trade openness condemns raw materials exporters to non-industrialization and whether closed trade promotes industrial exports in the long run. To do this, they regress the change in the share of primary exports

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more rapidly from being primary-intensive to manufactures-intensive exporters. The difference in speed of adjustment is statistically significant. Harrison (1996) starts from the judgment that it should be evident that no independent measures of so-called openness is free from methodological problem. Therefore, to make her point, she collects as many different openness indicators as she can, about 7 of them, and she checks the consistency of the results across all these indicators. She uses various samples, whose time spans range from 1960-1998 to 1978-1987,and the country coverage varies from 51 to 17.she first runs typical cross-country growth regressions. It appears that only one measure of openness out of 7, namely the black market premium, has a significant impact on growth. To explain this weak result the author argues that a pure

cross-section specification, based upon long-run averages, is not an adequate one. Indeed, though the use of long run averages appears as the most natural way to capture the determinants of long-run growth, they may also hide significant variations in individual countries performances and policies over time. To test this idea, the author re-does her regressions using annual data for the same variables. She uses a panel fixed-effects specification to take into account unobserved country specific differences in growth rates. Results show a stronger link between openness and growth since 3 indicators become significant at the conventional 5% level. The author next argues that such a yearly frequency is too high if one is interested in long-run growth, since results may be affected by short-term conjectural, variations. She therefore considers a third- intermediate- specification, based on five-year averages and reports that, again 3 indicators come out with a significant coeffi23

cient. The message from these results, as the author states, is that the choice of the time period for analysis is critical. However, an interesting regularity appears across all specifications: When openness is significant; it is always in the sense that greater openness is associated with higher growth. Edwards (1998) also uses an important number of openness indexes to investigate the trade and growth relationship. He considers a sample of 93 advanced and developing countries, and estimates a growth equation with a panel data random effects model. From that model, he computes factor shaves, which are then used to get TFP estimates. Concentrating on a cross-section of 1980s averages, TFP growth is finally regressed upon initial income level, initial human capital level, and no less than 9 openness indicators, each one of them in turn. The author reports that in all but one of the 18 equations the estimated coefficient on the openness indicator has the expected sign and in the vast majority of cases it is significant. Moreover, the coefficient on initial human capital is always significant and positive. Regarding the initial income level, the coefficient is always negative and in 16 cases out of 18, it is significant though very low, which can be interpreted as evidence in favor of conditional convergence. To summarize, the authors concludes that his results are quite remarkable, suggesting with tremendous consistency that there is a significantly positive relationship between trade openness and growth. An important paper that is able to cast serious doubts about the consistency of the tradegrowth relationship is the one by Rodriguez and Rodrik (1999). These authors consider a series of previous research results, among which Dollar (1998). Sachs and Warner (1995), 24

and Edwards (1998). The re-do the computations in these papers, but slightly change the specifications (through the addition of some dummies, e.g.), add newly available data to the sample, or slightly change the estimation methods. They are able to demonstrate a fundamental lack of robustness of the results in the paper they reviewed. Frankel and Romer (1999) claim that openness, as measured by the ratio of total trade to GDP, should not be used as explanatory variable in the growth regressions. The trade ratio, the authors argue, is endogenous, and needs to be instrumented. To construct their instrument, the authors first argue that as the literature on the gravity model of trade demonstrates, geography is a powerful determinant of bilateral trade. And they claim this is also true for total trade. Moreover, geography is completely exogenous. Therefore, the authors consider a database of bilateral trade between 63 countries for 1985 and they regress bilateral trade upon purely geographical indicators. For each country, the fitted values of trade are aggregate over all partners, and this aggregate is finally turned into an ideal trade share that can be used as an instrument for the observed one. The authors then estimate growth equations for a cross-section of 150 countries in 1985. They report a substantial impact of trade openness on income growth: increasing the trade share by 1% should raise income by between 0.5% and 2%. These findings are robust to various changes in specifications. The results also suggest that, controlling for openness; larger countries tend to experience higher growth rates, which could simply reflect that citizens living in larger countries engage more in within country trade.

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Baldwin and Sbergani (2000) argue that the reason why researchers failed to find a robust relationship between trade and openness is because that relationship is fundamentally non linear and non-monotonic. They raise the point that the fundamental engine of growth is human and physical accumulation, and that the link between capital accumulation and trade barriers is, in nearly all models, non linear and often even non-monotonic. They provide a formal 2x2x2 dynamic model with imperfect competition that gives rise to (i) all-shaped relationship between ad-valorem tariffs and growth and (ii) a bell-shaped relationship between specific tariffs and growth. This model is then confronted to the data, i.e. for a variety of openness indicators (actually, 10 of them are considered), a quadratic model is estimated. It turns out that, in this new specification, for 6 of the 10 proxies both the linear and the quadratic terms are significant individually. The authors conclude that: allowing for non-linearity does have a big empirical impact. A number of other studies have looked at the relationship between average tariff rates and growth. Lee (1993), Harrison (1996) and Edwards (1998) found negative relationship between the tariff rates and growth. The studies of Edwards (1992), Sala-i- Martin (1997) and Clemens and Williamson (2001) conclude that the relationship is weak. Rodriguez and Rodrick (1999) tried to replicate the result of Edwards (1998) and found that average tariff rates had a positive and significant relationship with total factor productivity (TFP) growth for a sample of 43 countries over the period 1980-1990. In a recent study Vanikkaya (2003) used a large number of openness measure for a crosssection of countries over the last three decades. His analysis found a significant positive 26

correlation between trade shares and growth. However, this study observed that different measures of trade barriers are positively associated with growth in the less developed countries. In recent empirical studies, one or more of the following indicators of openness in the table below are used: Measure Trade dependency ratio Growth rate of exports Tariff Averages Collected Tariff Ratios Coverage of Quantitative Restrictions Black market premium Definition The ratio of exports and import to GDP The growth rate of exports over the specified period A simple or trade-weighted average of tariff levels. The ratio of tariff revenues to imports. The percentage of goods covered by quantitative restrictions. The black market premium for Foreign exchange, a proxy for the overall degree of external sector distortions.

Trade Bias Index

The extent to which policy increases the ratio of importable goods prices relative to exportable goods prices compared to the same ratio in world markets. Sachs And Warner Index A composite index that uses several trade-related indicators tariffs, quota coverage, black market premiums, social organization and the existence of export marketing boards. Learners Openness Index An index that estimates the difference between the actual trade flows and those that was expected from a theoretical trade model. Table1: openness indicators. (Rodriguez and Rodrik, 2000; Ogujiuba, Oji and Adenuga, 2004). Gross man and Helpman (991) and Matsuyama (1992) provide theoretical models where a technological backward country specializes in a non-dynamic sector as result of openness, thus losing out from the benefits of increasing returns. Underlying this result, there is an

27

imperfection in contracts or in financial markets that makes people obey a myopic notion of comparative advantage. Dollar and Kraay (2004) and Loayza, Fajnzylber, and Calderon (2005) run growth regressions on panel data of large samples of countries. Both papers use openness indicators based on trade on trade volumes and control for their joint endogeneity and correlation with country-specific factors through GMM methods that involve taking differences of data and instruments. This implies that, although they continue to use cross country data, these papers favors within-country changes as the main sources of relevant variation. Both papers conclude that opening the economy to international trade brings about significant growth improvements. Wacziarg and Welch (2003) arrive to a similar, though more nuanced, conclusion from a methodological different stand point. Using an event-study methodology where the event is defined as the year of substantial trade policy liberalization--, they find that liberalizing countries tend to experience significantly higher volume of trade, investment rates, and most importantly, growth rates. However, in an examination of 13 countrycase studies Wacziarg and Welch find noticeable heterogeneity in the growth response to trade liberalization. Although their small sample does not allow for definite conclusions, it appears that the growth response after liberalization is positively related to conditions of political stability. Also, various empirical literatures offer some examples of non-linear specifications considering interaction effects. On the related topic of foreign direct investment, Borensztein, De Gregorio and Lee (1998) find that the growth effect of FDI is significantly positive only 28

when the host country has, respectively, sufficiently high human capital and financial depth. Specifically in the analysis of grow effects of trade openness, an important antecedent of our work is the empirical study by Bolaky and Freund (2004). Using crosscountry regressions in levels and changes of per capita GDP and controlling for simultaneity via external instruments, they find that trade opening promotes economic growth only in countrys that are not excessively regulated. They argue that in highly regulated countries, growth does not accompany trade openness because resources are prevented from flowing to the most productive sectors and firms, and trade is likely to occur in goods where comparative advantage is actually missing. Calderon, Loayza, and Schmidt Hebbel (2004) interact in their panel growth regressions a measure of openness (volume of trade /GDP) with linear and quadratic terms of GDP per capita, which they regard as proxy for overall development. They find that the growth effect of trade opening is nearly zero for low levels of per capita GDP, increases at a decreasing rate as income rises, and reaches a maximum at high levels of income. Chang, Kaltani and Loayza (2005) study how the effect of trade openness on economic growth depends on complementary reforms that help a country take advantage of international competition. They presented some panel evidence on how the growth effect of openness depends on a variety of structural characteristics. They use non-linear growth regression specification that interacts a proxy of trade openness with proxies of educational investment, financial depth, inflation, stabilization, public infrastructure, governance, labourmarket flexibility, ease of firm entry, and ease of firm exit. They find that the growth ef29

fects of openness are positive and economically significant if certain complementary reforms are undertaken. Giles and Stroomer (2005) develop flexible techniques for measuring the speed of output convergence between countries when such convergence may be of an unknown non-linear form. They then calculate these convergence speeds for various countries, in terms of half lives, using a time-series data-set for 88 countries. These calculations are based on both non parametric kernel regression and fuzzy regression and the results are compared with more restrictive estimates based on the assumption of linear convergence. The calculated half-lives are regressed, again in various flexible ways, on cross-section data for the degree of openness to trade. They find evidence that favors the hypothesis that increased trade openness is associated with a faster rate of convergence in output between countries. Joffrey (2003) in his work tries to clarify a number of issues related to the trade openness and growth debate. He considers a number of sector specialization indicators and examine whether they indeed affect the link between openness and growth. Using both cross-section and panel data techniques, he finds that both its pattern are likely to affect significantly the link between openness and growth. On research studies that relate to Africa and Nigeria in specific, Sarkar (2007) examines the relationship between openness (trade-GDP ratio) and growth. The cross-country panel data analysis of a sample 51 countries of the South during 1981-2002 shows that for only 11 rich and highly trade-dependent countries a higher real growth is associated with a higher trade share. Time series study of individual country experiences shows that the majority 30

of the countries covered in the sample including the East Asian countries experienced no positive long-term relationship between openness and growth during 1961-2002. He finds that the experience of various regions and groups shows that only the middle income group exhibited a positive long-term relationship. Also, Baliamoune-Lutz and Ndikumana (2007) explore the argument that one of the causes of the limited growth effects of trade openness in Africa maybe the weakness of institutions. They also control for several major factors and, in particular, for export diversification, using a newly developed data set on Africa. Results from Arellano-Bond GMM estimations on panel data from African countries show that institutions play an important role in enhancing the growth effects of trade. They find that the joint effect of institutions and trade has U-shape, suggesting that as openness to trade reaches high levels, institution play a critical role in harnessing the trade-led engine of growth. The results from this paper are informative about the missing link between trade liberalization and growth in the case of African countries. Likewise, Ogujiuba, Oji and Adenuga (2004) test the validity of trade openness for Nigerias long-run growth using a co-integration approach. They preferred the VAR approach for some reasons and their econometric results show that there is no significant relationship between openness and economic growth, and that unbridled openness could have deleterious implications for growth of local industries, the real sector and government revenue. Moreover, Addison and Wodon (2007) study the macroeconomic volatility, private investment growth, and poverty in Nigeria. Using cross-sectional data for 87 countries, they 31

show that real per-capita growth over the period 1980 -1994 was a function of productivity growth and investment rates, both of which were negatively affected by volatility (in terms of trade, real exchange rate, and public investments). When comparing Nigeria to high growth nations, they find that most of the growth differential can be attributed to Nigerias higher macroeconomic volatility. Simulations suggest that if Nigeria had lower levels of volatility and better macro- economic policies, poverty would have been much lower than observed. Nwafor (unpublished) examines the effects reduction of import tariffs will have on poverty in Nigeria, using information on Nigerias past experience with trade liberalization he examined the possible impacts on the economy with a view to making the reductions pro-poor. Kandiero and Chitiga (2003) investigate the impact of openness to trade on the FDI inflow to Africa. Specifically, in addition to economy wide trade openness, they analyze the impact on FDI of openness and manufactured goods, primary commodities and services. The empirical work is conducted using cross-country data comprising of African countries observed over four periods: 1980-1985, 1985-1990, 1990-1995, and 1995-2001, they find that FDI to GDP ratio responds well to increased openness in the whole economy and in the services sector in particular. Finally, Njikam, Binam and Tachi (2006) assess the factors behind differences, in total factor productivity (TFP) across sub-Sahara Africa (SSA) countries over the period 1965-2000. The cross-section, fixed effects using annual data, fixed-effects using data in 3year averages as well as the seemingly unrelated regression (SUR) results show that (i) 32

openness to world trade is conducive to TFP in SSA region only if issues related to supply conditions such as poor transport and communication infrastructure, erratic supply of electric energy. Corruption and bad governance, insufficient education of the labour force etc are adequately addressed, (ii) physical capital accumulation is important for TFP, (iii) the size of the financial sector mattes for TFP, in some SSA countries and negative for TFP in other SSA countries. 2.3 LIMITATION OF PREVIOUS STUDIES

The literatures of previous studies are plagued with a lot of problems. First of all, it is worthwhile to note that the theoretical growth literature has given more attention to the relationship between trade policies and growth rather than the relationship between trade volumes and growth. Therefore the conclusion about the relationship between trade barriers and growth cannot be directly applied to the effects of changes in trade volumes on growth. There was also no consensus on the nature of the relationship and nature of linear association (correlation) between openness and growth. Likewise, there is no generally accepted measure of openness indicators as it suit and please the researcher(s). Moreover, many of the existing empirical literature are not country-specific, that is they deal with cross-sectional analysis, thus they did not provide for differential in nature and structure of various economies. Hence, developing countries like Nigeria are recommended policies which are based on research conducted for industrially advanced countries or even mixture of both.

33

CHAPTER THREE METHODOLOGY 3.1 ANALYTICAL FRAMEWORK

The primary aim of every economic research is to arrive at a conjunction of economic theory, actual measurement using the theory and techniques of statistical inferences as the matching bridge (Haavelmo, 1994). The economic theory makes statement or postulates hypothesis that are mostly quantitative (and some cases qualitative) in nature and as such, it is the choice of the modeler or the researcher to validate these hypothesis using appropriate models in line with current development and betting method of estimation and inference. Economic theory and some empirical research argue that openness (trade or financial) will definitely increase output growth while others opened that the relationship between the two is ambiguous. In order to contribute empirically to this argument, this study will employ econometric method as the research technique. The choice of method is necessitated by the nature of the study which in this case is an analysis of relationship among variables. 3.2 MODEL SPECIFICATION

An economic model is a representation of the basic features of an economic phenomenon; it is an abstraction of the real world (Fonta, Ichoku and Anumudu, 2003). The specification of a model is based on the available information relevant to the study in question. This is to say, the formulation of an economic model is dependent on available information on the study as embedded in standard economic theory and other major empirical works, or else, the model would be theoretical. Two models are postulated in this research work; the first 34

is a non-monotonic model to capture the first and second objective of the study, while the second is an analysis of covariance (ANCOVA) model. The functional form of these models can be specified as follows: Model I: RGDPt = (TPNt,TPNt2, RERt, RIRt, UNEMPt, TREND)..(i) Mode II: RGPt = f (DUMt, TREND, (DUMt*, TREND)).(ii) The mathematical form of the model can be expressed as: Model I: RGDPt: o + 1TPNt + 2TPNt2 + 3RERt + 4RIRt +5UNEMPt + 6TREND Model II: RGDPt = o + iDUMt + 2TREND + 3(DUM*t TREND) ------------------(iv)

But equations (iii) and (iv) above are exact or deterministic in nature. In order to allow for the inexact relationship among the variables as in the case of most economic variables stochastic error term t is added to both equations. Thus, we can express the econometric form of the models as:

Model I:

35

RGDPt = o + 1TPNt + 2TPn2t + 3RERt + 4RIRt + 5UNEMPt + 6TREND + it -------------------------------------(v) Model II: RGDPt = 0 + 1DUMt + 2TREND + 3(DUM*t TREND) +2t

------------------------------------------------------------------(vi) Where RGDP = Real Gross Domestic Product which is a proxy for the real output of the economy. TPN = The Degree of openness measured as trade GDP ratio i.e. (import + Export)/GDP TPN2 =Real exchange rate RIR = Real Interest Rate Unemployment Rate O for pre-SAP period observations I for post SAP period observations TREND = = The chronological arrangement of time The stochastic error term

UNEMP = DUM =

In order to properly estimate the parameters of the postulated models, we rescale the dependent variable by logging it, thus, transforming them into a log-line models as follow:

Model I: 36

LOG (RGDPt) = o+ 1TPNt

+ 2TPN2t +3RERt + 4RIRt + 5UNEMPt

+6TREND + it -------------------- --------------(viii) Model II: LOG (RGDPt) = 0+1DUMt+2TREND +3 (DUM*tTREND) +2t

------------------------------------------------- (viii) Also, in order to avoid a spurious regression, we subject each of the variables used to unit root (or stationary) test so as to determine their orders of integration, since unit root problem is a common feature of most time-series data. 3.3 JUSTIFICATION OF THE MODEL

The choice of the model in this work is triggered by the fact that, though, trade openness at the early stage of introduction into a developing country like Nigeria would certain have a different structure and pattern where compared with its long run effect on the economys output performance. This fact is embedded in the standard development economic theory and buttress by Baliamoune- Lutz and Ndikumana (2007). The explanation follows suit: at the early stage, when a developing country like Nigeria open up its economy for trade, its domestics firms will face intense competition with the tiger foreign firms as the entire market will be flooded with imported products which are cheaper and relatively better in terms of qualify than the domestically produced products. This will make some of the infant industries to loss their sales with less revenue along side with high cost of production. This is unlike the foreign firms that enjoy low cost of production either economies of large

37

scale production. As a result, many domestic firms will be forced out of the market. This will surely have a negative effect on the economy. Nevertheless, as the economy is acquiring new technologies from abroad via openness as well as improving on its domestic infrastructure and capacity utilization of resources in the long run, this will lead to low cost of production for the domestic infant industries and enable them to compete favorably with the foreign products in the marked. This will certainly have positive effect on the economy as its domestic production capacity will increase which will further lead to increase in export products, thus, having favorable balance of payment. Another argument also suggests that developing countries should look inward to achieve its development in the long run. From the on going discussion, it is evident that fitting a monotonic model for such a situation would either over estimate or under estimate the actual potential of the economy; hence the need for a non-monotonic model. The postulated model is a real model as its variables are all in real form except unemployment. While the degree of openness and real exchange rate represent the external shocks to the economy, the real interest rate and unemployment rate represent the internal shocks to the economy. Meanwhile, the second model is constructed to test for structural charge in the growth output before and after the introduction of the structural Adjustment Program (SAP) in 1986. Finally, the Error Correlation Model (ECM) is postulated so as to capture the linkage between the short run dynamics of the economy and the long run equilibrium of the economy. 3.4 ESTIMATION TECHNIQUES 38

In order to develop strong, robust and reliable models that capture the relationship before trade openness and output growth, the research work adopts the econometric techniques of the Non-Monotonic modeling and the Analysis of Covariance (ANCOVA) modeling. In building these models, the Ordinary Least Square (OLS) is used as the estimation technique. The method of OLS is extensively used in regression analysis primarily because it is initiatively appealing and mathematically much simpler than nay other econometric technique (Gujarati, 2003). The OLS method is based on some assumptions (see Gujarati, 2003) which make the OLS estimators to become Blue (Best linear Unbiased Estimator). Some of the short comings of the OLS method include the fact that while some of its assumptions are unrealistic (such as no autocorrelation, homoscedasticity and no multicollinearity); a single model as well can not fully satisfy all the assumptions at a time. Also, no single test can solve all the problems of this method at a time. Moreover, the OLS method can not be applied to purely nonlinear models such as ones that are non-linear in parameter. As a result of some of these short-comings, we use the OLS method but correct the stand errors for autocorrelation by a Newey-West method. The corrected standard errors are known as HAC (Heteroscedasticity and autocorrelation-Consistent) standard errors or simply as Newey-West standard errors. Hence, we have to apply individual initiative along side with the empirical rules and tests so as to obtain tenable and robust results. Thus, an econometric modeling is said to be more of an art than a science. 3.5 EVALUATION PROCEDURE 39

3.5.1

ECONOMIC TEST (A Priori Expectation)

Tests shall be conducted to ascertain the a priori expectations which examine magnitude and signs of the parameter estimates. This evaluation is guided by economic theory. The aim of this test is to conform whether the parameter estimates conform to a priori expectation. The variables used in the model and their a priori expectations are analyzed below in table (2).

Variables RGDPt

Definition This is Real Gross Domestic product which represent the real output represent the real output of the economy. Its natural logarithm is taken This is the degree of trade openness in an economy it measures the international competitiveness of an economy in the global marked. It is an external stock to the economy. This is the squared term of the degree of trade openness. It shows the structural pattern of openness relative to output growth This is the real exchange rate. It is the rate at which the domestic currency is being exchanged for the foreign currency with adjustment for relative price index; it is an external shock to the economy. This is the real interest rate. It is the real cost of borrowing fund in the financial market. It is an internal shock. This is the unemployment rate in the economy.

Expected sign It is the dependent variable and considered to be stochastic. It is expected to be positive.

TPNt

TPNt2 RERt

Since the structural pattern could be of any type, it can be positive or negative. It is expected to be negative.

RIRt UNEMPt DUMt

It is expected be negative It is expected to be negative.

It is an internal shock. This is a dummy variable introduced to capture Since the effect of a policy the effect of the structural Adjustment Pro- could be favorable or adverse, gramme (SAP) trade deregulation and liberal- its signs can be positive or 40

ization policies. negative. TREND This is the chronological arrangement of time It is expected to be positive. which captures the incremental growth of output over time. It also serves the purpose of detrending the fluctuations among the exogenous variables. ECMt-1 This is the error correction mechanism. It is expected to be negative. Table 2: a priori expectations 3.5.2 STATISTICAL (FIRST ORDER) TEST

Here, various statistical tests will be carried out so as to verify the acceptability, reliability, and robustness of the estimated regression result. The tests include: Student t-Test This is used to test the statistical significance of the individual parameter estimates in the regression models. This work will use the t-distribution to test the statistical significance of these parameter estimates. F-Test This is used to test for the overall significance of the model. It tests the simultaneous null hypothesis of all the parameter to be equal to zero in the regression model.

R2-Coefficient of Determination This test is used to measure the goodness of fit of a regression line. It measures the proportion of the total variation in the dependent variable explain by the repressors in the model. r- Coefficient of Correlation

41

This measures the significance of the strength of linear association (correlation). The correlation coefficient measure the degree of association between two variables (such as TPN and RGDP in the case of this work). It is obtained through the product moment correlation coefficient. 3.5.3 ECONOMETRIC (SECOND ORDER) TEST

Here, various tests will be carried out in order to verify whether the estimated regression results conform to the classical (normal) linear regression model assumption. This test includes:

Test of Normality This test is used to verify whether the error term is normally distributed. The Jacque-Beva (JB) test will be used to verify this assumption. Test of Heteroscedasticity This test is used to verify the assumption of equal spread of the error variance (homoscedastic) between members of the same series of observations. The whites heteroscedasticity test (with no cross term) will be employed in the test. Test of Autocorrelation This test is used to verify the randomness of the error term between members of the same series of observations. As a result of the numerous assumptions and problems associated with the conventional Durbin-Watson (DW) test, the Breusch-Godfrey (LM) test will be employed to verify this hypothesis. 42

Test of Specification Error This test is used to verify whether the econometric regression model being estimated is correctly specified. The Ramseys RESET (Regression Specification Error Test) will be employed. Forecast Test This test is used to verify the reliability of the estimated regression model in forecasting future values. The Henry Theils in equality coefficient will be used to evaluate the forecasting performance of the model.

3.6

SOURCES OF DATA AND SOFTWARE FOR ESTIMATION

Data is the most important materials for any economic research or analysis, and very much indispensable to the field of econometrics indeed. Gugarati (2003 asserted that the success of any econometric analysis ultimately depends on the availability of appropriate and accurate data. In other words, the researcher should always keep in mind that the results of research are only as good as the quality of the data. The research study makes use of secondary data. The data used are obtained from the Central Bank of Nigeria (CBN) statistical bulletin 2007 and National Bureau of Statistics (NBS) online publication for 2006. The percentage ratio and real values are computes by the researcher in order to capture the objective of the study and in congruence with economic theory.

43

The econometric software packages used for the analysis of this work are the Reviews 3.1 and SPSS 14 versions, white the Microsoft Excel 2003 is used to enter the data.

CHAPTER FOUR PRESENTATION AND ANALYSIS OF RESULTS 4.1 INTRODUCTION

The purpose of this chapter is for presentation, evaluation and analysis of the regression results of the models postulated as well as verification of the various working hypothesis of 44

this research which are drawn from the objective of the study. The results of the OLS regressions of the first and second models are presented below. The parameter estimates are also subjected to various economic, statistical and econometric tests. Finally, we analyze our results in order to verify whether they conform to the working hypothesis of this study. 4.2 PRESENTATIONS OF REGRESSION RESULTS

The ordinary least square (OLS) regression results for first and second models are presented below: Model 1: Dependent variable: LOG (RGDP) Variable C TPN TPN2 RER RIR UNEMP TREND Coefficient 10.18152 0.025450 0.000190 5.67E-05 -0.006919 0.012686 0.019105 Std. Error 0.134217 0.006052 5.00E-05 1.51E-05 0.003754 0.004581 0.002605 t-statistic 75.86839 4.205461 -3.811704 3.757570 -1.842949 2.769490 7.333272 Probability 0.0000 0.0002 0.0006 0.0007 0.0749 0.0094 0.0000

Table 3: results of model 1 R2 = 0.924212 Adjusted R2 =0.909543 F-statistic = 63.00557 D-W statistic = 1.790166

For full detail of model 1 results see appendix (1) Model II: Dependent variable: LOG (RGDP) 45

Variable Coefficient C 11.21105 DUM -0.772697 TREND 0.002437 DUM* TREND 0.040715 Table 4: results of model II R2 = 0.847398

Std. Error 0.136498 0.172093 0.013885 0 .014603 F-statistic = 62.93409

t-statistic 82.13329 -4.489996 0.175541 2.788147

Probability 0.0000 0.0001 0.8617 0.0086

Adjusted R2 = 0.833333 D-W statistics =0.556859 Consult appendix (II) for complete results of 4.2.3 THE ERROR CORRECTION MODEL (ECM)

The existence of cointegration among the variable of the model which we verified above necessitates the need for the postulation of the error correction model (ECM). This model aims to link the short run dynamics with the longrun equilibrium the result of the ECM is presented below. Dependent variable: DLOG (RGDP). Variable C D(TPN) D(TPN2) D(RER) D(RIR) D(UNEMP) ECMt- 1 Coefficient 0.031238 0.013803 -9.41E-05 -1.08E-05 -0.003360 -0.002548 -0.1785507 Std. Error 0.015978 0.005890 4.40E-05 1.58E-05 0.001588 0.003612 0.72896 t-statistic 1.955105 2.343573 -2.140235 -0.682625 -2.115853 0.705384 -4.543232 Probability 0.0599 0.0259 0.0406 0.5001 0.0428 0.4860 0.0001

Table 7: Result of the Error correction model R2 = 0.502682 F-statistic = 5.053938

Adjusted R2=0.403219 D-W statistic =1.407372 46

see appendix (v) for comprehensive result of the error correction model. 4.3 4.3.1 INTERPRETATION AND EVALUATION OF RESULTS EVALUATION BASED ON ECONOMIC CRITERIA

In this section, we present the economic interpretation of the regression results and verify whether parameter estimates in each model conform to a priori expectation. Model 1: In the first model, the dependent variable is the log of real GDP while the independent variables are: Degree of openness to trade, the squared term of the openness to trade real exchange rate real interest rate, unemployment rate and the trend value. CONSTANT(C): In the first model, the constant coefficient of 10.18152 represent the value of log of RGDP at the beginning of the study period i.e. LOG (RGDP) = 10.18152. By taking the antilog, we obtain that the value of real GDP at the beginning of the study period (i.e. 1969) is N26.410.58 million (=e 10.18152), other factors held constant. DEGREE OF OPENNESS TO TRADE (TPN): The sign of its coefficient is positive. This conforms to the standard economic theory which postulates that trade openness enhance economic growth. The coefficient of 0.025450 implies that over the study period, on average, a one percentage (1%) increase in the degree of trade openness leads to approximately 2.55% (0.025450 x100%) increase in output growth. This early stage increase in output growth as a result of openness to trade may be due to internal vibrancy of govern-

47

ment objectives, development of infrastructure and, indeed, the oil boom of the 1970s. REAL EXCHANGE RATE (RER): The sign of the real exchange rate coefficient is positive. This does not conform to the theoretical postulation which stressed that as foreign currency say (dollar) appreciate (negative) against the domestic currency (say Naira), exports will become cheaper while imports will be more expensive, hence, greater net export which turn means increase in GDP (output). Thus there should be a negative relationship between RER and RGDP. The coefficient of 5.67E-05 means that over the period of study, a 1% increase in real exchange rate, on average, leads to approximately 0.006% (=0.00000567 x100%) increase in the output growth (RGDP). Although the economic impact of RER on RGDP in Nigeria is very small, it is however statistically significant. This result indirectly shows the magnitude of the impact of the foreign exchange market to the growth of the economy. The foreign exchange market is regarded as the largest market in the world. However, the result shows that it has little impact on the Nigerian economy. This may be as a result of the fact that the exchange market in Nigerian is largely dominated by the parallel market (fondly known as black market) which is regarded as part of underground economy and not accounted in the national income computation. Also, the sign of real exchange rate is positive. This may be as a result of inconsistency in government policies with regard to exchange rate. REAL INTEREST RATE (RIR): The sign of the real interest rate coefficient is negative. This conforms to a priori expectation as increase in rate of interest leads to rise in cost of 48

borrowing which discourages investors from borrowing for investment purpose, thus, reducing investment level; hence, reducing productivity and output. The result further shows that during the study period 1% increase in real rate of interest will on average lead to approximately 0.69% (=0.006919 x 100%) decrease in real GDP. But this result is not statistically significant. This reflects the low level of development of the financial sector in the economy especially the money and capital markets. The result further implies that the financial sector instrument (interest rate) does not have significant economic impact in determining the level of output growth in Nigeria. UNEMPLOYMENT RATE (UNEMP): The coefficient of unemployment rate has a positive sign. This does not conform to economic theory which postulates that a rise in unemployment level will reduce productivity, hence output growth. The unemployment rate coefficient of 0.012686 indicates that a 1% increase in unemployment rate, on average, leads to approximately 1.27% increase (0.012686 x 100%) in real GDP. This kind of result is only possible when the impact of a few highly skill labour, employed at the expense of much unskilled labour that is laid-off is economically significant. One of the arguments in favour of openness to trade is that new technologies and skills in the production process may require more of capital and little labour. Hence, a branch of undeveloped, inept and sluggish labour is retired to the labour market causing high rate of unemployment. Hence, the simultaneous coexistence of increased growth of output as a result of improved skill and technology on one hand, and high unemployment rate on the other hand in the economy. Nevertheless, the proportional relationship between unemployment 49

and real GDP also indicate the explosive nature of the unemployment rate which has a significant impact on industrial development in the nation. Moreover, the result reflects the impotence of various government policies to curb unemployment in the face of stagnation and fluctuation of macroeconomic indicators in the economy. TREND: The sign of the trend value is positive which conforms to a priori expectation. The 0.019105 trend coefficient indicates that, on average, output growth (proxy by RGDP) increased at the rate of 1.91% (0.019105 x100%) per annum, other variables held constant. But the compound rate of growth of output over the study period is approximately 1.93% i.e. [(e0.019105-1) 100%].0.02% difference between the actual and compound rate of growth is due to the compounding effect. Moreover, the trend coefficient is highly significant to detrend the time relationship among the explanatory variables. THE ERROR CORRECTION MODEL In the ECM, the coefficient of the differenced variables reflects the short run dynamics. In this model, all the variables conform to the priori expectation. Also all the variables are statistically significant except for the RER and UNEMP. The Error Correction Mechanism (ECMt-1) is also negative which conform to a priori expectation. The negative value of the ECM implies that output growth (proxy by RGDP) is above equilibrium and will start falling in the next period to correct the equilibrium error. The coefficient of -0.785507 implies that about 79% (0.785507 x100%) of the equilibrium error will be corrected in the next period. That is, RGDP will adjust to equilibrium by about 79% in the next period. The speed

50

of adjustment of the ECM is sufficiently high to correct the imbalance in the macro economic fluctuation. The 0.013803 coefficient of the differenced TPN implies that in the short run, a 1% rise in degree of openness will lead to about 1.38% (=0.013803 x100%) increase in RGDP. The differenced TPN2 coefficient of -9.41E-05 indicates that a further 1% increase in squared term of the degree of openness will lead to a minute decline in RGDP by about 0.009% (see fig.5 above). Also, a 1% increase in real interest rate (RIR) will lead to about 0.001% decline in RGDP in the short run. Nevertheless, this result is not statistically significant. Moreover, on the short run a 1% increase in the real interest rate (RIR) will lead to about 0.34% decline in real GDP. Furthermore, a 1% rise in unemployment rate will cause output growth fall by about 0.25% in the short run. However, this result does not have much economic impact.

4.3.2

EVALUATION BASED ON STATISTICAL CRITERIA

Here, the t-test, f-test and R2 (coefficient of determination) are carried out to test the statistical reliability to the estimated parameters and the regression results in general. In order to avoid repetition, these tests are carried out on the regression results of the first model only. We will also test for the degree of association between RGDP and TPN using the product moment correction coefficient . 51

t-Test. This is used to determine the statistical significance of individual parameter in a model. The hypothesis to be tested is: Ho: Hi: i = 0 (the estimated parameter is statistically insignificant). i 0 (The estimated parameter is statistically significant).

The test statistic is given as: T = ^i ~t /2 (n-k)df Se(^i) The critical value is obtained from the students t-distribution table at (/2) level of significance and (n-k) degree of freedom. Decision Rule: Reject Ho if/t-cal/>t/2(n-k) df, otherwise do not reject. Alternatively, using the rule of thumb, we could reject Ho if/t -cal/>2. At = 0.05, n-38, k=7 t /2 (n-k)df =t0.025(31) 2.042. The calculated t-values are presented below on the result obtained from the regression on model 1. Variable C TPN TPN RER RIR t-statistic 75.868 4.205 -3.812 3.758 -1.843 Critical 2.042 2.042 2.042 2.042 2.042 Decision /t/>t*:Reject H1 /t/>t*:Reject Ho /t/>t*:Reject Ho /t/>t*:Reject Ho /t/<*: do not Reject 52 Conclusion Statistically nificant Statistically nificant Statistically nificant Statistically nificant Statistically sigsigsigsigin-

UNEMP TREND

2.769 7.333

2.042 2.042

Ho /t/>*: Reject Ho /t/>*:Reject Ho

significant Statistically significant Statistically significant

Table 8: Summary of the t-test From the results displayed in the table above, we conclude that all the parameter estimates, are statistically at 5% level of significance except for real interest rate which is statistically significant at 10% critical level. F-Test This measures the overall significance of the regression model. The F-value provides a test of the null hypothesis that the true slope coefficients are simultaneously zero. That is: Ho: x1 =2 =3 = 4 =5 = 6= 0 (the model is statistically insignificant) Hi: 23 4 56 0 (the model is statically significant) The test statistic is given 25: F = ESS/(k-1)~ F (k-1, n-k)df RSS/(n-k) Where ESS=estimated sum of square RSS = Residual sum of square The critical value is obtained from the F-distribution table at level of significance and (k-1, n-k) degree of freedom. Decision Rule: Reject Ho if F-statistic>f (k-1, n-k)df ; Otherwise, do not reject Ho From the regression result 53

F-statistic = 63.00557 At =0.05, n=38, k=7 F(k-1, n-k)df = F0.05(6,31) 2.42. Conclusion: Since f-statistic =63.00557 is greater than the critical F=2.42, we thereby reject Ho and conclude that the model has a robust fit and it is statistical significant. That means there exist a true relationship between the regression and the regresses. R2 (Coefficient of Determination) This measures the goodness of fit of the estimated model. The R2 measure the proportion of total variation in the regress and explained by the regression model. From the regression result the R2 is 0.924212 while the adjusted R2 is 0.909543. This means that the model explain about 92% of the total variation in real GDP (output growth). This high R2 cannot be said to be statistically significant for the true goodness of fit in a model unless subjected to test. The hypothesis to be verified here is: Ho: H1: R2 = 0 (the R2 is statistically insignificant) R2 0 (the R2 is statistically significant)

The test statistic for the critical R2 is given as R2 = (k-1)f (k-1)f + (n-k) Where f is the critical-f value at level of significance, k is the number of parameters in the model and n is the number of observations.

54

Decision Rule: Reject Ho if observed R2 is greater than the critical R2: otherwise do not reject Ho. From the regression result; Observed R2 0.924 At = 0.05, k=7, n=38 R2 = 0.319. Conclusion: Since observed R2 = 0.924 is greater than the critical R2 = 0.319, we thereby reject Ho and conclude that the coefficient of determination (R2) is statistically significant and a true goodness of fit for the model. r (coefficient of correlation) This is a measure of the degree of association between two variables. It measures the strength of degree of linear association between two variables. The product moment correlation coefficient is given as r= nx1y1-(y1) (nx12 (x1)2][ny12-(y1)2)

When the coefficient of correlation (r) between real GDP (x1) and degree of openness (yi) is computed, it is observed that: r = 0.594989 This result shows that there is positive relationship (or linear association) between output growth and trade openness. The correlation of about +0.6 implies that there is a positive modern linear association or correlation between openness and output growth in Nigeria. But is this correlation coefficient statistically significant? 55

To answer this question, we subject the correlation result to test. The hypothesis to verify is. Ho: 0 = 0 (true linear association does not exist between the two variables) H1: 0 0 (true linear association exist between the two variables). The test statistics is given as; Z = x ~N(0,1) Where x =1/2 ln 1-r
1-r

= ln 1-0
1-0

1 = n-3 The critical value is obtained from the standardized normal distribution (/2) level of significance. Decision Rule: Reject Ho if /Zcal/> Z 12, otherwise do not reject Ho. After simple computation, we observed that X =0.68535,. =0, =0.16093 :. Zcal = 4.056 Also, zt=0.05 Z12=Z0.025 = 1.96

56

Conclusion: Since Zcal =4.0546 is greater than Z/2 =1.96, we therefore reject Ho and conclude that the correlation coefficient of trade open and real GDP is statistically significant. This means that linear association (correlation) truly exists between the two variables at 5% level of significance.

CHAPTER FIVE SUMMARY, POLICY PRESCRIPTION AND CONCLUSION 5.1 SUMMARY

This research works pursuit is to unravel the structural relationship between trade openness and output growth in Nigeria from 1970 to 2007. It aims to determine the structural impact of trade openness on output growth in the presence of other internal and external 57

macroeconomic shocks using a non-monotonic approach. It further used an Analysis of covariance (ANCOVA) model to determine the possibility of structural change in output growth so as to understudy the policy effect of the Structural Adjustment Programme (SAP) of 1986 which tends to liberalize trade. The regression results of the first model show that there indeed exist an inverted U-Shape quadratic relationship between trade openness and output growth in Nigerian. This is reflected in the negative sign of the squared term of degree of openness. Also, all other macro economic variables in the model including real exchange rate and unemployment rate are interest rate which is statistically significant at 10%. These variables do not only exert significant impact on output growth in the short run but also in the long run, and various diagnostic and performance test have been conducted to verify the reliability of these results. Also, in the regression results obtained from the second model, we observed that the policy thrust of the IMF/World Bank-Sponsored Structural Adjustment Programme (SAP) does not only have a significant impact on the output growth in Nigeria but in fact have positively changed the trend of growth of output in the economy. This implies that the trade liberalization policy of SAP has a significant positive effect on output growth in Nigeria. This result is further buttressed by the positive moderate correlation coefficient of about 0.6 obtained. This indicates that trade openness and output growth are as well linearly associated. That is, an increased openness to trade could as well mean a rise in output growth. 5.2 POLICY RECOMMENDATIONS

58

Based on the finding of this research work discussed above, we hereby proffer the following policy measures for long term sustenance of output growth in the economy. First of all, there should be optimal control of trade through the borders of the economy. The underground economic activities of bunkering, smuggling, child and drug trafficking, and other related illegal activities should be properly checked. This will help the economy to fully account for every trade/transaction through the border and determine its impact on the output growth of the economy. In order to achieve this, governments trade policy must be liberal. Also, government should properly regulate import tariff so that it will not be discouraging in such a way that it will aid illegal importation. Secondly, there is a dire need for adequate infrastructural development in the country. Nigeria has been recently noted to be one of those Africa countries that have difficult geographic condition. The country is the largest oil producer in Africa and the 6 th largest oil producer in the world. Yet, the countrys infrastructure is at serious decay. This has negative effect on output growth as cost of production is high due to high due to high transportation, communication, and other services costs. Government should devote much of its resources to the development of infrastructure. Excess crude oil revenue should be properly allocated for infrastructural development such as good roads, potable waters, standard rail system, buildings and other public utilities. Thirdly, there is a need stable macroeconomic policy as regard to the exchange rate system of the country. Exchange rate is one of the most volatile macro economic variables. But this variable has not been properly handled in such a way that the country will derive opti59

mum benefit from it. As a result, the growth of output in the economy has been thwarted. The government should put sound machinery in place to properly monitor the movement of exchange rate and regulate it indirectly through currency depreciation or directly through devaluation. This will make the countrys exports to become cheaper and imports more expensive; hence, a favourable balance of payment which will enhance output growth. The countrys reserve also needs proper management. Also, there is still need for greater development in the financial sector of the economy. The financial sector is said to be hub of every economy. The on going capital market as well as the money market reform are examples towards the development of the financial sector. The government needs o put in lace proper and non- partisan machineries for supervision and regulation of this sector so as to achieve optimum performance. Moreover, stagnation is one of the various macro-economic problems the economy has been facing for the past three decades. This is a situation where the economy is simultaneously experiencing rise in inflation and unemployment rate at the same time. Various government efforts towards this problem have proven to be economically insignificant and this has seriously inhibited the growth of productivity, hence output, in the economy. Government should redirect its priority and properly allocate its resources to combat these problems. This could be achieved by creating conducive environment for business; give special attention to education, proper control of government financial spending, effective expenditure switching and expenditure reducing polices, and sound fiscal and monetary policy objectives for the economy in a specified period. 60

Furthermore, there is an urgent need for diversification of the economy. The Nigerian economy has been depending on crude oil exportation. But today, this strange dependency has really dampened the growth of the economy as the country is open to every international shock associated with the oil market. Government should look inward to seek for other fallow grounds where it can explore and generate resources. Government should explore other sector of the economy such as manufacturing, agriculture, mining and quarrying. Finally, the government should vigorously seek to improve the international stand of the economy with other economies of the world so as to enlarge the market for Nigerian exports. It should also re-orient its policy towards the external sector and ensure that the sector contribute optimally to output growth.

5.3 CONCLUSION The contribution to be drawn from this study is that trade openness have a significant economic impact on output growth in the presence of other internal and external macro economic shock. Nevertheless, to achieve a high and sustainable output growth, we proffer some policy recommendation which when properly implemented will surely stimulate greater growth of output. Meanwhile, it is not all the areas that need proper treatment are adequately treated due to various limitations being faced by this research work. But we recommend that further studies be genuinely carried out using different and more sophisticated methodologies and 61

choice variables in other to harmonize the structural relationship between trade openness and output growth in Nigeria.

BIBLIOGRAPHY Addison, D. (1998). Managing Extreme Volatility for long run Growth. Oxford ,Clareden Publishers. London:

Alexander, S.S. (1952). The Effects of Devaluation on a Trade Balance. New York: Sache City Publishers. Amadeo, E. (1994). Institution, Inflation and Unemployment. London: Aldershot Edword Elgar. Arida, P. and Resende, A. L. (1985). Inertial Inflation and Monetary Reform in Brazil. Washington: Iahiran publishers.

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Baldwin, R. and Sbergami, F. (2000). Non-linearity in Openness and Growth links. Geneva: Woodsheilf Publishers. Carolie, B, and Smith, B.D. (1989). Money, Banking and the International of Real and Normal Exchange Rates. Florida: Oxford Macmillan publishers. Chang, R., Kaltani, L. (2005). Openness can be good for growth. The role of policy complementarities. London: Oxford .University press. Ellworth, P. T. and J.C. Lenth. (1975). The International Economy. London: Collier Macmillan. Frankel, J.A and Rodrigilez, C. (1975). Portfolio Equilibrium and the Balance of Payments. New York: Eldine Economic Review. Heymann, D. and Nufrid, A.L. (1995). High Inflation. London: Oxford Clarendon Press. Jeffrey, S. and Acron, T. (1996). Finance of crisis in Emerging Markets London: Oxford Clardon Press. Kreuger, A. D. (1983). Exchange Rate Determination. Cambrige: University. Press. Melo, J. and Panagariya, A. (1993). The New Regionalism. A country perspective. Cambridge: Cambridge University press. Joffrey, M. (2008). Trade Openness and Growth. Florida, Thonmpson Publishers. Leamer, E. (1998). Measures of Openness. In Trade policy issues and Empirical Analysis. Chicago: The University of Chicago press.

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Thirlwall, A.P. (2000). Trade, Trade Liberalization and Economic Growth: Theory and Evidence. Abidjan: Mustafa Printing Press.

JOURNALS Anderson, J. E., & Neary, J. P. (1992). Trade Reform with Quotas, partial Rent, Retention, and tariffs Econometrica 60: 57-76. Baldwin, R.E (2000). Trade and growth: still Disagreement about the relationship working paper N0 264. OECD Economics Department. Baliamoune lutz, M. and Ndikumana, L. (2007). The growth effects of openness to trade and the role of institution: New evidence from African countries working paper N0 2007-05. Department of economics, University of Massachusetts, Amherst, February Barro, R. (1991). Economic growth in a cross-section of countries the Quarterly journal of economics, 106(2): 407-43. 64

Barro, R. and lee, J.W. (1996). International measures of schooling years and schooling quality. The American Economic Review, paper and proceeding. 86(2):218-23. Dickey, D.A., and Fuller, W. A. (1979). Distribution of the Estimators for Autoregressive Time series with a unit root. Journal of the American Statistical Association. HR focus, 74, 427-431. Harberzar, A. C. (1980). Currency Depreciation, Income and Balance of Trade. Journal of Political Economy. HR focus 31, 4-7.

APPENDIX A: DATA PRESENTATION Year 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 BP 5223.3 8712.6 7565.2 4606.4 10067.6 7453.5 6767 31192 40444 22695 49751 42661.5 52993.8 193412.9 285294.4 192731.8 CB 63252.5 76589.1 79652.8 86534.2 89936.6 98564.1 159190.8 226162.8 295033.2 385141.8 458777.5 584375 694615.1 1070020 1568839 2247100 SM 13934.1 18676.3 23249 23601.3 29651.2 37738.2 55116.8 85027 100460.6 108490.3 134503.2 177648.7 200066.1 277667.5 385190.9 488045.4 65 GDP 71859 108183 142618 220200 271908 316670 875342.5 1089680 1399703 2907358 4032300 4189250 3989450 4679212 6713575 6895198

2002 2003 2004 2005 2006 2007

435601 276680 434299 3047856 677957.4 3753278 834522.9 4741125 1651513 6400784 2028220.03 7612568.3

592004 7795758 655739.7 9913518 797557.2 11411067 1316957 14610882 173 18564595 2226795.5 22015709

Source: central Bank of Nigeria (CBN) Statistical Bulletin (2007)

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